You can engage in financial planning services that are with a fee-only, fee-based, or commission based advisor. These terms explain the way your financial planner is being compensated.
In this blog, we’ll explore what fee-only financial planning is, how it works, its pros and cons, and how it compares to other types of financial planning services.
What Is Financial Planning?
Financial planning is the ongoing experience of creating a financial strategy to achieve your goals and dreams.
The planning process involves:
- Assessing your current financial situation
- Setting objectives
- Developing a plan or list of action items needed to reach those goals
The CFP® Board (CERTIFIED FINANCIAL PLANNER™) outlines that the following topics are central to the financial planning experience:
- Cash flow & debt management
- Investment planning
- Retirement savings & income planning
- Tax planning
- Risk management & insurance planning
- Estate planning
What Is Fee-Only Financial Planning?
Fee-only financial planning is an advisory service where your advisor is compensated solely by you. They don’t receive commissions or incentives from financial product sales.
The fee-only compensation model aims to minimize conflicts of interest by aligning the advisor with the client’s best interests.
Fee-only financial planners typically charge:
- An hourly rate
- A flat fee or annual retainer
- Or a percentage of assets under management (AUM) deducted from your investment accounts
These advisors typically offer you both financial planning and investment management services.
How Fee-Only Financial Planning Works
In a fee-only financial planning service, you pay the advisor directly for their advice.
- Hourly Fees: You pay for the advisor’s time on an hourly basis. This is often used for specific financial planning tasks or consultations.
- Flat Fees or Annual Retainer: You pay a fixed amount for ongoing financial planning services. The frequency of the retainer can be annually, quarterly, or monthly.
- Percentage of AUM (Assets Under Management): You pay the advisor a percentage of their investments. The fee is commonly deducted quarterly out of your investment accounts.
Fee-Only Financial Planning Pros and Cons
Pros
- Transparency: You will know exactly how your advisor is getting paid.
- Less Conflicts of Interest: Because fee-only financial planners do not receive commissions, they don’t have incentives to sell you products. Conflicts of interest are not completely eliminated however. Advisors who manage investments can be biased against recommendations that would cause the investment account balances to drop.
- Fiduciary Responsibility: Fee-only financial advisors are fiduciaries. This means they are legally obligated to prioritize your interests over their own.
Cons
- Cost: Fee-only services can feel expensive. This is especially true if you aren’t used to paying out of pocket for financial advice.
- Accessibility: Some fee-only advisors have high minimum investment asset requirements.
- Less of a One-Stop-Shop: Because fee-only financial advisors don’t receive commissions, you will need to have their insurance and loan products held at other institutions.
Comparing Fee-Only and Other Types of Financial Planners
Here is a comparison table to illustrate the differences between fee-only, fee-based, commission-based financial advisors:
Feature |
Fee-Only Planners |
Fee-Based Planners |
Commission-Based Advisors |
Advisor Compensation |
Hourly rate, flat fee or Retainer, or percentage of AUM (Assets Under Management) | Combination of fees and commissions | Commissions from product sales |
Conflicts of Interest |
Minimal and related to investment decisions if the advisor offers an AUM (Assets Under Management) pricing model | Potential conflicts surrounding investment decisions as well as recommendations involving commission products | Higher likelihood of conflicted advice due to a full reliance on product sales |
Fiduciary Responsibility |
Primarily act as fiduciaries | May or may not act as fiduciaries (Commonly referred to as the dual-hat approach) | Typically do not act as fiduciaries |
Services Commonly Offered |
Financial Planning, Investment Management | Financial Planning, Investment Management, Insurance Product Sales, Loan Product Sales, etc | Investment Product Sales, Insurance Product Sales, Loan Product Sales, etc |
Transparency |
High | Moderate | Low |
Typical Fees |
$150-$500/hour, $1,000-$12,000 flat fee or annual retainer, or 0.5%-1.5% AUM (Assets Under Management) annually | The advisor also receives commissions for sales of financial products including insurances and loans | You do not pay the advisor directly. The advisor is entirely paid by the companies whose products they sell |
What Do Fee-Only Financial Planners Typically Charge?
The cost of fee-only financial planning varies based on experience, location, and the complexity.
Common cost ranges include:
- Hourly Fees: $150 to $500 per hour
- Flat Fees or Retainer: $1,000 to $12,000 annually for a comprehensive financial planning engagement.
- Percentage of AUM: 0.5% to 1.5% of assets under management annually. Breakpoints and discounts can apply as accounts get larger.
Sometimes fee-only planners will charge a combination of the above listed items.
How to Choose a Fee-Only Financial Planner
Choosing the right fee-only financial planner is similar to hiring any other qualified service professional:
- Credentials: Look for advisors with reputable certifications such as CFP® designation (CERTIFIED FINANCIAL PLANNER®).
- Membership Organizations: Look for advisors who belong to: NAPFA (National Association of Personal Financial Advisors), the XY Planning Network, the Garrett Planning Network.
- Experience: Consider the advisor’s experience and expertise in dealing with clients in similar financial situations. Does the advisor specialize in helping clients in your line of work? Do they serve clients at your stage of life?
- Services Offered: Ensure the advisor provides the specific services you need. If you aren’t looking for help with investment management services, then you may want to find an advisor that offers “advice-only” financial planning.
- Client Reviews: Check reviews and testimonials from current or former clients where possible. Regulation has recently passed allowing advisors in certain states to provide client testimonials and reviews. Unfortunately this is not always the case as some states in the US still ban this practice.
Make the Most with Your Money by Choosing Stage Ready Financial Planning for Fee-Only Financial Planning
At Stage Ready Financial Planning, we specialize in fee-only financial planning for individuals and couples over age 50 in Dayton & Southwest, Ohio.
We help you create a clear and easy to understand plan so that you can retire with confidence and afford your ideal lifestyle. Schedule your introductory call today!
FAQs
Is a fee-based financial planner worth it?
Working with a fee-based financial planner can be worth the investment if they provide valuable advice. It’s important to understand how your fee-based financial advisor integrates product sales into their planning recommendations.
Be aware of recommendations to purchase large insurance policies or products. It’s possible that these recommendations are legitimate. Be sure to ask lots of questions to understand the assumptions used in developing the advice.
Is hiring a CFP® professional worth it?
Looking to hire a CFP® professional can be a great starting point for researching who to hire. They have extensive training, a rigorous certification process, and a commitment to acting in their clients’ best interests.
Because the CFP® Board doesn’t mandate how financial planners implement advice and services, it’s important to consider many other factors. When looking to hire your advisor consider their experience, specialization, services offered, and client reviews or testimonials.